Taking Stock

In this chapter, we have discussed models of technology differences across societies. While the baseline endogenous growth models, such as those studied in Part 4, are useful in un­derstanding the incentives of research firms to create new technologies and can generate different rates of technological change across different economies, two factors suggest that a somewhat different perspective is necessary for understanding technology differences across nations.

A number of important lessons have emerged from our study in this chapter.

(1) We can make considerable progress in understanding technology and productivity differences across nations by positing a slow process of technology transfer across countries. Namely, in light of the within-country evidence, which suggests that even within narrowly-defined sectors in the same country different technologies can survive side-by-side for long periods of time, it seems reasonable to assume that technologically backward economies will only slowly catch up to those at the frontier. Such an approach enables us to have a tractable model of technology differences across countries. An important element of models of technology diffusion is that they create a built-in advantage for countries (or firms) that are relatively behind; since there is a larger gap for them to close, it is relatively easier for them to close it. This catch-up advantage for backward economies ensures that models of slow technology diffusion will lead to differences in income levels, not necessarily in growth rates. In other words, the canonical model of technology diffusion implies that countries that create barriers against technology diffusion or those that are slow in adopting new technologies for other reasons will be poor, but they will eventually converge to the growth rate of the frontier economies. Thus a study of technology diffusion enables us to develop a model of world income distribution, whereby the position of each country in the world income distribution is determined by their ability to absorb new technologies from the world frontier. This machinery is also useful in enabling us to build a framework in which, while each country may act as a neoclassical exogenous growth economy, importing its technology from the world frontier, the entire world behaves as an endogenous growth economy, with its growth rate determined by the investment in R&D decisions of all the firms in the world. This class of models becomes useful when we wish to think of the joint process of world growth and world income distribution across countries. This class of models also emphasizes that much is being lost in terms of insights when we focus our attention on the baseline neoclassical growth model in which each country is treated as an “island onto itself,” not interacting with others in the world.

(2) While slow diffusion of existing technologies across countries is reasonable, in the globalized world we live in today, it is becoming increasingly easier for firms to adopt technologies that have already been tried and implemented in other parts of the world. Once we allow a relatively rapid diffusion of technologies, does there re­main any reason for technology or productivity differences across countries (beyond differences in physical and human capital)? The second part of the chapter has argued that the answer to this question is also yes and is related to the “appropri­ateness” of technologies. A given technology will not have the same impact on the productivity of all economies, because it may be a better match to the conditions or to the factor proportions of some countries than of others. Part of this chapter was devoted to explaining how the issue of appropriate technologies can play a role in different contexts. In our current age of pervasive skill-biased technologies, a particularly important channel of appropriateness is the potential match between technologies developed at the world frontier and the skills of the adopting country’s workforce. A potential technology-skill mismatch can lead to large endogenous pro­ductivity differences. If the types of technologies developed at the world frontier were random, the possibility of the technology-skill mismatch creating a significant gap between rich and poor nations would be a mere possibility, no more. However, there are reasons to suspect that technology-skill mismatch may be more impor­tant, because of the organization of the world technology market. Two features are important here. First, the majority of frontier technologies are developed in a few rich countries. Second, the lack of effective intellectual property rights enforcement implies that technology firms in rich countries target the needs of their own domestic market.

(3) Productivity differences do not stem simply from differences in the use of different techniques of production, but also because production is organized differently around the world. A key reason for such differences is institutions and policies in place in different parts of the world. The last part of the chapter showed how contracting institutions, affecting what types of contracts firms can write with their suppliers, can have an important effect on their technology adoption decisions and thus on cross-country differences on productivity. Contracting institutions are only one of many potential organizational differences across countries that might impact upon equilibrium productivity. My purpose in presenting these ideas in this chapter is to emphasize the importance of endogenous productivity differences resulting from differences in the organization of production. We will see more on this when we turn to the relationship between the process of economic growth and the process of economic development in Partof the book.

18.5.